Strong 2Q for Sunoco

Oil refiner and marketer Sunoco Inc. ( ) has reported bright second-quarter 2012 results, owing to robust performances from all business units coupled with contributions from attractive acquisitions and impressive marketing skills.

The company has reported earnings per share (excluding special items) of $1.22, comfortably beating the Zacks Consensus Estimate of 47 cents. Comparing year over year, the results also improved substantially from the prior-year adjusted earnings of 17 cents per share.

Quarterly revenue came in at $12.23 billion compared with $11.32 billion in the prior-year quarter. The result also breezed past our projection of $5.9 billion.

Segmental Performance

Refining & Supply: The segment generated profit of $87 million during the quarter, against the $44 million loss incurred in the second quarter of 2011, benefiting from improved volumes and margins. Increased oil pipelines fees and positive effects from acquisitions of 2011 also boosted the performance.

Realized margin averaged $7.43 per barrel, up from $4.31 per barrel in the prior-year quarter, while total throughputs declined approximately 30.8% year over year to 323.5 thousand barrels per day (MBbl/d).

Retail Marketing: Quarterly profit for the segment was $73 million, up from $69 million in the year-ago quarter. The upside was primarily due to better diesel and retail gasoline margins.

Gasoline retail margin in the quarter increased 2.5% year over year, while that of diesel spiked 23.4% from the prior-year quarter.

Logistics: The segment’s profit jumped 51.9% year over year to $82 million attributable to increased realized margins plus a drop in expenses.

Crude oil gross margin in the quarter moved up to 88.7 cents per barrel from 61.6 cents per barrel in the second quarter of 2011.

Capital Expenditure & Balance Sheet

During the reported quarter, Sunoco incurred a capital expenditure of about $128 million. As of June 30, 2012, Sunoco had cash and cash equivalents of $1.88 billion and long-term debt (including current portion) of approximately $2.55 billion. Debt-to-capitalization ratio was 59.3%.

Acquisition

Early in the quarter, natural-gas pipeline operator Energy Transfer Partners L.P. ( ETP - Analyst Report ) announced an agreement to acquire Sunoco for about $5.3 billion. As per the terms of the agreement, Sunoco shareholders will get $50.13 in cash or stock for each share they hold. The deal has been approved by the board of directors of both the companies and is expected to close by the latter half of 2012.

Our Recommendation

With a favorable view of Sunoco’s efforts to exit its refining business and the company’s impending merger with Energy Transfer Partners, we believe investors will now be more confident in holding Sunoco shares.

Sunoco currently retains a Zacks #2 Rank, which translates into a Buy rating for a period of one to three months.